(FORTUNE Magazine) - By now most everyone knows that the old-style pension is in a heap of trouble. Desperate companies like UAL have already dumped plans. Other basket cases such as
Delphi and Delta are threatening to do the same. But the most surprising news - and most ominous for tomorrow's retirees - is what one healthy company did earlier this year: IBM froze
its traditional pension. That plan is fully funded, and IBM is strong. Yet as of Jan. 1, 2008, no one in the plan will accumulate any more benefits. The move was a landmark in the
realm of employee benefits, where Big Blue has set standards for decades.

Yes, the decline of traditional pensions has been striking and much discussed, but IBM's (Charts) action suggests a different perspective. In today's world, why do these things exist at all? Consider: Today's low
long-term interest rates, combined with a stock market that's no higher than it was six years ago, have made traditional defined-benefit plans a crushing financial burden to many
firms - just as they're feeling the heat from foreign businesses that don't have plans. In addition, research shows that young employees increasingly don't care about traditional
pensions, designed to pay off big after a lifetime of work with one company. And a raft of coming regulatory changes will make those plans even more burdensome to employers.

Result: "There's not an organization I know of that hasn't had discussions about its defined-benefit plan in the past year or won't be having them in the coming year," says Alan
Glickstein of the Watson Wyatt consulting firm. At some firms that discussion is epochal. "Some of these plans have not been looked at fundamentally since World War II," he says. One
of Glickstein's competitors, Ari Jacobs of Hewitt Associates, notes a significant change in what's motivating the conversations: "There's a new movement of questions from very senior
people - CEOs, directors. They've read an article about recent changes and are asking, 'Why are we in this? Should we be?' "

It's all happening so fast that many people, especially today's workers, still haven't caught up to the new reality. (Believe it or not.) Only 21% of U.S. workers participate in
defined-benefit plans, says the Bureau of Labor Statistics. Yet an incredible 61% expect to receive benefits from such a plan in retirement, according to recent research from the
Employee Benefit Research Institute. Not all those people are necessarily delusional. Some may have earned benefits in a previous job, while others may be counting on benefits from a
spouse's plan, and a few may even expect to get a traditional pension in some future job. But those factors can't account for the whole disparity. As EBRI's researchers put it drily,
those workers' expected benefits are "unlikely to materialize."

More broadly, many workers aren't facing the fact that coming changes mean their life in retirement will be radically different from the lives of today's retirees. "The years 1965 to
1999 were the closest thing to economic golden years ever seen by this nation for those moving into retirement," says EBRI chief Dallas Salisbury, "and they will likely never be
matched again for the bulk of the population unless savings behavior changes radically." Which it shows no signs of doing. The implications could include a nasty political standoff as
growing blocs of aging voters demand to be taken care of - Social Security aside.

The problem's root is that the defined-benefit pension is an employee perk designed for a different economic world. It entered the business mainstream after World War II, and for good
reasons. Here was an age when many workers, including the best young ones, were looking for a great employer with which to make a lifelong career. The baby boom was booming, and
capital markets were serene, with stocks rising and interest rates stable. Foreign competitors were rarely significant.

In that world the defined-benefit pension made perfect sense for the man in the gray flannel suit and his employer. In a typical plan you become vested - eligible for benefits - after
working at a company for a few years. The longer you're there and the more you're paid, the greater your monthly pension check. That is, the benefit - the monthly check - is defined
in the plan. In most traditional plans, benefits build up slowly in your early years, then accelerate. "The value skyrockets as you near retirement," explains Watson Wyatt's
Glickstein. "You might earn half of your total retirement pay in a year near the end of your career." It all works out great if you retire between age 60 and 65 and head for St. Pete.

But it isn't so great if you don't work at one place for that long. And it isn't so great for the boss. The most important reason employers are now bailing out of traditional pension
plans, and virtually no new company adopts them, is the rise of competitors that have lower costs because they don't offer traditional pensions. Mostly these are younger, smaller
companies.

Announcing the plan freeze, an IBM executive noted accurately that IBM is one of the few companies in the whole infotech industry offering a defined-benefit plan (not even Microsoft (Charts) has one); freezing it will save as much as
$3 billion over the next five years, the company says. Airlines like United and Northwest (Charts) have to compete with Southwest (Charts) and JetBlue (Charts), which have no such plans. Verizon Communications
(Charts), which last year froze its traditional plan for 50,000 managers, must increasingly compete with Internet
firms that never adopted such plans. "The driver more and more is a perception that many others are moving away from defined-benefit plans - so shouldn't we be studying what we should
be doing?" says Glickstein. To make matters worse, folks overseas generally rely on state pensions (and their own savings). Against foreign competitors, corporate pension costs make
U.S. companies increasingly uncompetitive.

Yet even if the U.S. were a closed economy immune to foreign competition, many companies would probably be shutting down traditional pensions because of the remarkable financial
trends of the past six years. For anyone managing a pension plan, the megatrend has been the historical plunge in long-term interest rates - still low, despite the rise in short-term
rates - plus a stock market that's stuck where it was in early 2000. For traditional pension plans, that combination is a potentially crippling double whammy. First, falling rates
make pension obligations much bigger. Those obligations are years, sometimes decades, in the future. To figure how much money must be in the pension fund to cover them, a company
discounts them to the present at some interest rate (typically a rate pegged to long-term corporate bond rates). So imagine that a company estimates it will be paying out $400 million
a year in pension payments 30 years from now - not an outlandish amount (for example, Johnson & Johnson estimates it will pay $357 million this year). Using the discount rate that
prevailed six years ago, the company would need $42 million in its pension fund to cover one year of that future obligation. But using today's lower rate, the company now needs almost
twice as much.

That's the first whammy, and it's a huge one. Somehow the company has to get tons more money into its pension fund. The most painful way is to take money out of profits. The
completely painless way is for the fund's investments to perform so well that it gets big enough all by itself. But here's where the second whammy hits. Most corporate pension funds
are invested 60% to 70% in stocks, so they've seen little appreciation over the past six years and may even have seen declines.

The bottom line for companies with pension plans: much bigger liabilities vs. scarcely bigger assets, resulting in far larger required contributions to the fund at a time when profits
are under merciless pressure. Little wonder that ever more CEOs are saying, "Make it stop!" And it gets worse. Congress and the accounting rulemakers are separately working on changes
that would make a defined-benefit pension plan much less attractive in a company's financial statements. The proposed law, which could emerge from Congress in final form any day now,
would also (among many other things) raise the insurance premiums that employers with traditional plans must pay to the Pension Benefit Guaranty Corp. For plans already in trouble,
the extra burden could be the last straw. Says Hewitt's Ari Jacobs: "The government is certainly not creating incentives to stay in these plans."

Against all those problems, could anything make a defined-benefit pension attractive to an employer? Yes, in theory one enormous thing: the plan's power to attract and keep good
employees. But today's employees, especially young ones, don't care about pensions as much as they used to. The average American worker holds ten jobs between ages 18 and 38, says a
recent Bureau of Labor Statistics study. A traditional pension, engineered to pay off big after a lifetime with one employer, would hold zero appeal for such workers. Most of them
don't work at one place long enough even to become vested in a plan, which would at least entitle them to some small benefit when they finally reach 60 or 65. A Watson Wyatt study
found that among employees under age 35, only 16% said a traditional pension plan was of high importance in choosing an employer; 64% said it was of little or no importance.

Combine all the factors bearing down on defined-benefit plans - the competitive threat from firms without such plans, the punishing economic environment, stricter regulation, the
waning attractiveness of such plans for prospective employees - and it's easy to see why traditional plans will keep fading away. Yet Americans show no sign of saving more in
response. The result is that some 40% of American workers will not achieve a reasonable level of replacement income by age 65, researchers James Moore and Olivia Mitchell estimated a
few years ago.

The repercussions could be severe. As the giant baby-boom generation begins to retire in large numbers, many of them will crash into unpleasant financial reality. Making it worse will
be the continuing rapid rise of medical costs as corporate retiree medical benefits evaporate even more quickly than pensions. Because the boomers swing such massive political heft,
they may well demand to be bailed out. And it's demographically certain that their cries will grow louder just as Social Security goes cash-flow negative about 2012.

Look hard enough for a bright side and you can find one, even here. Today's middle-aged generation has observed the lucky retirees who hit retirement before them and has foolishly
assumed that a similar life awaits them. When many of them discover how wrong they are, their plight may impress today's kids and adolescents. Motivated in ways that no
financial-planning seminar can ever achieve, maybe they'll actually save and invest prudently for their own retirement 50 years from now. That's a long time to wait for a bright side
to today's pension crisis. No need to be depressed, however. Remember, though people in general aren't rational about saving and investing, you can be. You can start averting your own
pension crisis anytime you want.